University of Augsburg
Lilia Filipova
Discussion of:
The Impact of Adjuster Moral Hazard on
Driving Records
ARIA
August 6, 2007
Quebec City
Property damage schemes

Third-party recovery scheme – Alberta
 time delay, higher costs of settling claims

First-party recovery scheme with collision coverage - Ontario
 Covers both the not-at-fault and the at-fault portions of the loss
 Moral hazard on behalf of the claims adjuster:
- No need for settling a claim with a third-party
- Assignment of fault has no effect on the compensation paid out
- Assuming that driver is not at fault can reduce settlement costs

Adjuster Moral Hazard implies that claimants are less likely
to be found at fault in first-party recovery scheme

Risk adjustment depends only on at-fault claims
 Some true high risk drivers are misclassified as low risk
drivers
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Incorrect assignment of fault

Implications
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Lower efficiency of experience rating
Driving record classes fail to represent the true risk
More pooling
Moral hazard on behalf of drivers
Insurance premiums become higher for the entire portfolio
Anecdotal evidence
 The rate of not-at-fault claims is higher with the first-party
recovery scheme
 With first-party recovery scheme the percentage of drivers in
class 6 is larger
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Theoretical Model

Purpose
 To analyze the impact of the incorrect assignment of fault on
the distribution of the insureds across the driving record classes
(misclassification) and on the resulting premiums.
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Simulation
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distribution of insureds in driving record classes
probability of at-fault accident for each class
rate class differentials for the driving record classes
insurance premiums
Comparison between first-best model and model with adjuster
moral hazard
Results – with adjuster moral hazard
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The probability for a single insured to be in class 6 is higher
The proportion of insureds belonging to class 6 is higher
Less differentiation in the rate class differentials
Premiums are higher for almost all classes
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Suggestions for further research

Stronger evidence on the existence of adjuster moral hazard
in first-party recovery schemes
 Measure the extent of adjuster moral hazard – the probability
that the adjuster records someone who is at fault as not at fault

Are there other reasons for the difference in the distribution
of drivers records?
 Are there any differences in the fault determination rules in
Ontario and Alberta?

Are there other reasons for the differences in the insurance
premiums?
 Is the average probability of accident the same for Ontario and
Alberta?
 Differences in product offerings and additional services?
 Is the rate of reported claims different?
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